Hog Futures Slammed on Weak Demand, Larger Supply

Futures Daily for Feb 14, 2013

Look at natural gas today! I don't think I've ever seen any commodity move nearly 4.5% in a single day before! Wheat, sugar, hogs, and silver are also big movers today! There is plenty of volatility!

Ag Commodities Blasting Higher Again

Beef -- near limit up three days in a row

Pork

Sugar

Livestock Futures (Near) Limit Down

Feeder cattle was limit down, and live cattle was nearly limit down. Lean hog was near limit down. I don't think I've ever seen this occur before!

Feeder cattle

Live cattle

Lean Hog

Daily chart for live cattle

Ag Commodity Inflation Is Here and Going to Get Worse

from Along the Watchtower blog:

Longtime readers will recall that we've had several conversations here regarding the impact that the Fed's quantitative easing policy is having on the costs of everyday food items. Soaring prices of agricultural commodities are going to continue to have a devastating effect on the purchasing power of average Americans and consumers around the globe. Since prices have now recovered some from the selloffs after the Japanese earthquake and tsunami and since there is no end in sight to QE, I thought it was time to once again take a look at out favorite commodities and assess where their prices may be headed over the spring and summer.

Let's start with the grains because rising grain prices cause all sorts of inflation. Not only are grains the raw input to countless consumer goods, grains are also the primary foodstuff for cattle ranchers and hog finishers as they prepare their herds for slaughter. Let's start with wheat, which is being influenced not just by the falling dollar. Price is also feeling the impact of the ongoing drought in the "winter wheat zone" of the high plains of Kansas, Oklahoma and Texas.
http://www.bloomberg.com/news/2011-03-24/worst-texas-drought-in-44-years-eroding-wheat-beef-supply-as-food-rallies.html
Now take a look at the chart. Long-term support held at $7.50 and wheat looks almost certain to catapult higher very soon.

OK, so how about corn? Corn is extremely important in food production as it is used not only as a primary ingredient but as a sweetener, as well. First, let's look at the chart. Support was found, as expected in the area around $6.50. I have no doubt that corn will soon resume its upward move along its primary trendline from last summer.

Now here's the deal with corn...it's expensive to grow! The primary fertilizer that Midwestern corn farmers utilize is anhydrous ammonia. Last year, anhydrous ammonia cost your average farmer about $425/ton. This year, the cost has almost doubled to $750-800/ton. So, while it might be tempting to seed a lot of acres with corn to capitalize on the high price, the input and production costs are so high that many farmers will choose to plant soybeans, instead. Less acres of corn planted lead directly to less production. Less production leads directly to even higher prices. (Remember that below when we get to cattle.)

So what about soybeans? Soybeans are the one grain that I don't expect to rise in price. They will, most likely, stay rangebound through the summer. Why? Besides the fertilizer costs affecting plantings, soybeans get extra acreage for another reason: Weather. Because soybeans have a shorter growing season, they are a "fall back plan" for many farmers who struggled to get corn planted due to overly wet spring conditions.
http://www.galesburg.com/news/x1777821638/Galesburgs-spring-outlook-cool-and-wet
If the upper Midwest spring turns out cool and wet, many farmers will forego corn planting and turn, instead, to soybeans. Extra supply = Lower cost.

Now, let's get back to corn. Have you ever heard the term "corn-fed beef"? Most of the best steakhouses proudly champion corn-fed beef because, frankly, its tastes a helluva lot better than grass-fed. The high sugar content of the corn gets converted into fat. The fat makes its way into the muscle and you, Mr. Steakeater, get yourself a beautiful, marbled "prime" steak. Fat cows are also desirable at slaughter because, well, they weigh more and cattle are sold by the pound. OK, so now, pretend for a moment that you're a cattle rancher. As your cattle are growing and being prepared for market (the term is "finished"), you want to feed them as much corn as they'll eat and you can afford. Corn at $7.00/bushel really cramps your business plan. Your first reaction is to control costs by thinning your herd, i.e. you sell some prematurely, before they are "finished". You might also simply want to sell some of your herd to take advantage of today's high prices.
http://www.saljournal.com/news/story/Cattle-prices-32411
Either way, this extra supply in the short term has actually worked to keep cattle prices from soaring at the same rate as the grains. But this is temporary. By this summer, supply will decrease as cattle that would have been coming to market just then have already been slaughtered. Are we already beginning to see this play out on the chart? Well, take a look:

Many of the same dynamics are in play in the pig market. Note the similar chart pattern of a recent breakout to new highs.

So what does all this mean? It means you'd better prepare. Maybe you're comfortable and you have all the disposable income you need. Great, but what about your sister, trying to raise her three kids on 50 grand a year? What about your neighbor or your best friend who is trying simply to make ends meet after losing a job? What can you do to help them?

You start by warning them about the coming surge in food costs brought about by quantitative easing. All of the factors discussed above, combined with soaring fuel costs, will most certainly lead to a much higher "cost of living" in the near future. The time to act is now.

Transitioning To Longer-Term Trades

I am in the process of transitioning to longer-term trades. This may permit me to spend more time during the day studying markets and, yes, blogging. I am also considering the possibility of starting a futures brokerage with a fellow futures trader who is an experienced broker. He trades on fundamentals and I trade on technicals, so it could be a complimentary relationship, both for me professionally and our clients.

With longer-term trades, I will be able to take more positions in different commodities and futures, including the softs, oats and rough rice, livestock (meats), interest rate futures (Eurodollars, swaps, fed funds, Euroyen Tibor) etc. This will be a way of not only spending less time trading, but also spreading and diversifying my risk.

If Grain Is So Expensive, Why Are Livestock Prices Falling?

This is important for America to understand. At the same time that grain futures prices are skyrocketing, prices for livestock are plummeting. Look at these two charts for Feeder Cattle (upper chart) and Lean Hogs (lower chart):
Why The Dichotomy?
At the same time that the prices of corn and other grains that feed livestock are going up like a mushroom cloud, why are prices for livestock plummeting?

I have posted these two charts above because I want to display graphically the phenomenon that is occurring. As can be seen in these two charts, prices for lean hogs and feeder cattle are plunging at the same parabolic rate as grains prices have been rising. Because it is too expensive to continue feeding the animals at current grain prices, ranchers are being forced to sell their livestock and send it to slaughter much sooner than planned. The cost to feed the animals is rapidly escalating, and rather than face bankruptcy by continuing to feed them, they are disposing of the animals. With so many animals being prematurely sent to slaughter, futures prices for pork and beef are plunging downward. Wholesale buyers are having a bonanza, buying the younger animals and reducing their input costs, increasing their profits (we're not seeing cheaper beef or pork at the grocery store, are we?).

So why should we care?
Because in about 12-14 months' time, the number of livestock animals in the United States will be significantly fewer, and then, meat prices will soar for two reasons:

1. Grains prices will go even higher still, as the number of animals on feed increase back to normal levels, further increasing upward price pressure on corn and other feed grains.
   
2. Fewer livestock animals available for meat production now will increase the price (lower supply + same demand = higher prices) for them later (lower supply leads to higher prices later) and will drive prices for hogs, poultry, and cattle futures through the roof.

When this occurs, the livestock ETF (ticker - COW) will then rise as rapidly as fireworks on the Fourth of July (or many more Americans will become vegetarians). We should begin to see this occur within 12-14 months according to livestock futures traders I've communicated with. In recent weeks and months, COW has been sliding toward the pits. See the COW chart below.
All of this is the terrible consequence of a badly misguided government policy of turning food (corn, soybeans, sugar) into fuel (ethanol). The only people who will ultimately benefit from this fiasco are the politicians! Meanwhile, America continues to slide toward energy oblivion!